January 15, 2010

JPMorgan Chase Drags Financials

Early Friday, the New York City-based bank posted a steep increase in fourth quarter profits to $3.3 billion, from $702 million a year earlier, on higher net revenue, offset by provisions for credit losses. Continued profits in JPMorgan Chase ( JPM – news – people )’s investment banking and asset management arms outweighed losses from consumer loan defaults.

Earnings per share soared to 74 cents, compared with 6 cents per share in the year prior quarter, easily beating analysts’ estimates for earnings of 61 cents per share in the quarter.

Still, investors were displeased and pushed JPMorgan Chase’s stock down 2.1% in early afternoon trading Friday, to $43.75, when the bank’s quarterly dividend remained unchanged from the current 5 cents per share payout. In October, bank executives said they were considering raising the dividend when loan losses stabilize and the bank’s credit costs fall.

JPMorgan Chase said it was not ready to determine whether losses on loans and mortgages had peaked, taking fellow financial stocks – and the rest of the market – lower in Friday trading. Shares of Wells Fargo ( WFC – news – people ) and Bank of America ( BAC – news – people ) were each down 3.3%; Citigroup ( C – news – people ) stock was off 2%.”The market has been pricing in the best-case scenario for earnings for all of these companies,” he said. “I think with an earnings report like this six months ago, we would’ve seen stocks rally.”

A dividend increase would have demonstrated the bank’s confidence in an economic rebound and improvement of consumer banking operations, noted Rochdale Securities analyst Richard Bove. “By increasing the dividend the board and management will be signaling their confidence in the 2010 earnings outlook,” Bove wrote. “No increase means that the outlook remains clouded.”

It may also have cut down on shareholder’s ongoing uneasiness about inflated bonuses paid to bank employees for 2009. Despite JPMorgan Chase cutting its work force by 1% during the year, total pay costs, including salaries, bonuses and benefits rose 18% in 2009 with average employee compensation rising to $121,124 from $101,110 in 2008. (See “Bankers Get Set For Bonus Bonanza” and “Bonus Backlash May Boost Wall Street Pay.”)

Dollar gains vs. euro on investors’ concern about Greece

NEW YORK (MarketWatch) — The U.S. dollar gained versus the euro amid worries about Greece’s fiscal situation and refuted rumors that German Chancellor Angela Merkel was preparing to resign.

“Though the rumors were vehemently denied, the damage was done,” said David Watt
senior fixed income and currency strategist at RBC Capital Markets. “Turmoil on Euro zone’s periphery is bad enough; political uncertainty at the core is a gratuitous piling on of bad news.”

Investors reacted skeptically to the Greek government’s budget plan. Worries about Greece’s financial woes and the risk of contagion and increased tensions within the single-currency region have served to put moderate pressure on the euro since December. Read more about Greece’s budget plan.

U.S. DOLLAR: CURB YOUR OPTIMISM

It has been quite a while since we have seen a sea of red in the forex markets, with nearly all of the major currency pairs ending the day in negative territory. The dollar strengthened against everything except for the Japanese Yen which only confirms that risk aversion is driving the flows in the forex market today. Unfortunately this means that the rally in the buck is a reflection of weakness and not strength. After a week of mostly negative U.S. economic reports, traders have found themselves overly bullish and are now compensating by taking profits on some of their positions. Even strong earnings from Intel last night or JPMorgan this morning failed to sustain risk appetite. Whether this sell-off in equities and rally in the dollar can be sustained remains to be seen but traders won’t find many answers in next week’s economic reports. The U.S. calendar is light with only the Treasury International Capital flow report, Producer Prices, Housing Starts, Philadelphia Fed and Leading Indicator reports due for release.

Curb Your Optimism

Up until last week when we saw the horrid December labor market numbers, most market participants were banking on a stronger U.S. recovery. However now traders have been forced to curb their optimism as the recent trend of economic data could prompt the Federal Reserve to grow more dovish and not hawkish. The U.S. central bank’s monetary policy meeting is in 2 weeks. Between now and then the focus of the foreign exchange will be on the possible tone that the Fed adopts on January 27th. The University of Michigan sentiment survey rose from 72.5 to 72.8 in the month of January which suggests that even though consumer confidence increased, the improvement was modest. This is a bit of concern considering that spending was weak last month. If consumers only grew only a tad more optimistic, then their spending habits may not have changed. Meanwhile industrial production grew by 0.6 percent in Dec, which was the same pace as the previous month after the downward revision to the November report. However capacity utilization increased which means that manufacturers have become more productive. The one piece of overwhelmingly positive data was the Empire State manufacturing survey which jumped from 4.50 to 15.92. Consumer prices also grew at a slower pace and the details of the report confirm that discounts led to weak consumer spending last month. Prices for personal computers for example fell 0.2 percent, leaving CPI growth at 0.1 percent for December. On an annualized basis, consumer prices rose from 1.8 to 2.7 percent but the bulk of that increase was due to energy prices.

Forex Traders Increase Short Dollar Positions

According to the latest commitment of traders report from the CFTC, forex traders have increased their short dollar positions in the futures markets. This report reflects position adjustments following last week’s disappointing non-farm payrolls report. The weak number prompted speculators to cut back on their long dollar positions as they grow more worried about the U.S. recovery. A closer look at the data reveals that long AUD/USD and short USD/CAD positions reached the highest level since June 2008. This suggests that at least in the near term, the upside potential in AUD and CAD could be limited barring any extremely dollar bearish or AUD bullish news. Futures traders trimmed their net short EUR/USD and long USD/JPY positions but increased their short GBP/USD positions. Since there are still many traders net short the EUR/USD, the downside risk in the currency pair could also be limited.

EUR: SUCCUMBS TO POLITICAL UNCERTAINTY

There are three reasons why the EUR/USD weakened dramatically today, breaking its recent uptrend. The euro primarily sold off on fears that German Chancellor Angela Merkel plans to resign amidst low approval ratings. Although she dismissed the idea as “absurd,” the damage on the euro was already done. We have learned a long time ago that political uncertainty is never good for a currency especially if it involves the head of state. At the same time, concerns about Greece’s fiscal problems have escalated after the cost of insuring against a Greek default hit a record high. This basically means that investors are demanding a greater premium to hold Greek debt. In response, European Union head Junker echoed ECB President Trichet’s comments by saying that Greece will not default on their debt or abandon the euro. Finally, weaker economic data also weighed on the euro. Even though Eurozone consumer prices increased modestly, the region’s trade surplus fell from EUR 6.6 billion to EUR 4.8 billion. Although the strength of the euro did not hurt trade in Germany, it negatively affected exports in Ireland, Greece and Spain. In the week ahead, there are a number of potentially market moving Eurozone economic releases including the German ZEW survey, the advance PMI releases and German producer prices.

GBP: BIG WEEK AHEAD

After strengthening against the U.S. dollar for six trading days in a row, the rally in the British pound has finally been halted. Yet the pound extended its gains against the euro for the fourth consecutive trading day. Unlike the U.S. economy and the U.S. dollar which fell victim to over-optimism, the British pound benefitted from too much pessimism. Although not much economic data was released this week, the few reports that came out beat expectations. More specifically, the trade deficit shrank in the month of November, the BRC retail sales monitor increased significantly and industrial production accelerated. These reports suggests that the U.K. economy may not be doing as poorly as everyone had previously thought and may even be out of recession as of January. Next week, the most market moving economic releases are due from the U.K. This includes consumer prices, their labor market report, the minutes from the most recent monetary policy meeting, retail sales and public finances. There is a good chance that most of the reports will the positive for the GBP, helping to extend the recent gains in the currency pair.

CAD: VERBAL INTERVENTION HEATS UP

All commodity currencies have fallen off in today’s session, with the loonie losing track of its 3-month high against the dollar. The combination of renewed risk aversion, driven by uncertainties in Europe, and declines in gold and oil has given the currencies little hope of continuing their winning streak. Even though these factors already provided a weakening force for the Canadian dollar, it was really comments from Finance Minister Jim Flaherty that offered the final blow. Flaherty subtly hinted at his disdain over dollar weakness, mentioning that “its plain to everyone that there’s downward pressure on the US currency.” He notes that his concerns run high anytime fluctuations in the greenback are abnormally volatile. It has been a while since we have heard comments like these coming from Canada, but with the currency approaching new lows, it was only a matter of time. Canada’s economic data was mixed with New Motor Vehicle Sales plunging 6.0% and Existing Home Sales rising to record highs. Next week’s schedule will be highlighted by Tuesday’s Bank of Canada rate decision. We can be sure that everyone is looking for more comments trying to talk down the loonie. In addition, we will see Consumer Prices on Wednesday and Retail Sales on Friday. Data from New Zealand and Australia have been light on the day. However, more is in store for next week with Tuesday’s New Zealand Consumer Price Index and Australia’s Westpac Consumer Confidence Index, followed by New Zealand Retail Sales on Wednesday.

JPY: BOJ EXPECTS GROWTH TO SLOW

The Yen was the only major currency that did not decline against the greenback, on a day of otherwise accelerated dollar strength. Today’s glut in economic data was offset by a new wave of central bank commentary. The Bank of Japan’s Kazuo Momma mentioned that the “pace of economic growth may slow temporarily because of decreasing public works spending.” These are grim comments from the central bank and indicate that they see the potential for the dreaded double-dip recession. Finance Minister Kan toned down his stance on the yen once again, saying that only under the exception where currencies are “extremely volatile” should the markets not govern exchange rates. This is Kan’s second revision to statements made upon his appointment in which he explained his preference for the yen to be a bit weaker. He also expressed his opinion that there are more measures that can be taken to fight deflation, signaling the governments hope that the BoJ takes easy money policies another step further. Next week’s data will come in the form of Industrial Production on Monday, Consumer Confidence, the Tertiary Industry Index on Tuesday, and the All Industry Index on Friday.

CAD/JPY: Currency in Play for Next 24 Hours

CAD/JPY will be the currency pair in play for Monday. Japan is set to release Industrial Production and Capacity Utilization at 11:30 pm ET Sunday night or 4:30 GMT Monday morning. On tap for Canada will be International Securities Transactions at 8:30 am ET or 13:30 GMT.

CAD/JPY remains hesitant to break back into the Bollinger band buy zone, as prices pullback after a two-day rally. In case losses extend further, support is in place at the January 12th low of 87.26. However, if prices reverse, the January 7th high of 90.61 remains the strongest level of resistance. Nevertheless, CAD/JPY’s inability to pull forward raises questions as to whether a deeper retracement will be required before a new leg higher can be maintained. This condition will be confirmed if the 87.26 support is broken.